Recently, I received a notice from the IRS indicating that they were auditing my corporate tax return for the 2002 and 2003 years. As a result of this audit, they are proposing an increase in corporate income taxes for my regular corporation of over $15,000, including interest and penalties. I had filed my corporate tax returns and paid tax at regular corporate rates, so I do not understand why I am being audited. Can you help?
Yes. A review of Form 4549, Proposed Income Tax Examination Changes, indicates that your corporation had taxable income of $20,507 in 2002 and $48,381 in 2003. Unfortunately, the tax paid with the returns was computed on the basis of regular corporate income tax rates (i.e., a 15 percent rate on the first $50,000 of taxable income). Section 11(b)(2) of the tax law requires all personal service corporations (including dental corporations) to pay tax at a flat rate of 35 percent. Accordingly, your best bet is to simply agree to the tax-examination changes and see if you can negotiate a reduction in the penalties.
For future years, I would recommend that you reduce your professional corporation's taxable income to zero through paying a bonus and/or making required retirement plan contributions to avoid taxation at the 35 percent rate. Furthermore, you should consider electing Subchapter S status for your professional corporation as soon as possible. By doing that, you can avoid potential double taxation of corporate earnings and practice sale proceeds, and enjoy the flow-through of long-term capital gains, the $102,000 Section 179 expensing election, and the $5,000 ADA tax credit, on your personal return.
I built a new dental office building in 1991, at a cost of $525,000, including $100,000 for the land. My CPA has been writing off the $425,000 building costs over 39 years, which has given me minimal depreciation deductions.
Recently, a colleague of mine told me that his accountant had found a way to dramatically increase the depreciation deductions on his office building. He got a huge refund last year. I thought all building costs had to be written off for over 39 years. Is he doing something illegal?
Probably not. In Hospital Corporation of America v. Commissioner, the Tax Court upheld an individual's ability to allocate a portion of building costs, such as dental-related plumbing, electrical, signage, parking lot, etc., to shorter economic lives that can be depreciated over a shorter period of time than 39 years. Through obtaining a cost segregation study by a reputable engineering firm, you should be able to determine how much of the building costs can be so allocated. Once this amount has been determined, the IRS allows you to claim the deductions for depreciation to which you were previously entitled, but have not claimed, on a single year's tax return. For further information, send a self-addressed stamped (57 cents) envelope to Blair/McGill & Company, 2810 Coliseum Centre Drive, Suite 360, Charlotte, NC 28217, and request the "Cost Segregation Analysis" article.
As the year-end approaches, I am looking for extra tax deductions, since my income has increased this year. I am thinking about prepaying part or all of next year's rent in order to generate extra deductions. Recently, my CPA said that I could only prepay rent for a limited period of time and still get a deduction. What's the rule here?
Under Treasury Regulation 1.263(a)-4(f), expenses may be prepaid for up to 12 months and still be fully deductible. Accordingly, you can prepay 12 months of rent expenses in December of this year and take the full deduction on this year's tax return.
I am planning on taking all of my staff for a four-day trip to Hawaii. This trip will include some staff meetings focusing on planning for the next year, as well as free time for side trips and activities. I talked with my accountant about this and he said that the employees will have to count the value of this trip as income, but I disagree. Who is correct?
You are. In a similar case, Townsend Industries, Inc. v. United States, 342 F.3d 890 (8th Circuit 2003), the court held that a similar trip was fully deductible for the business involved, since there was a definite business purpose (in this case, staff training and business planning) and the business had a realistic expectation of gaining future benefits from the trip. Moreover, the value of the trip was not considered as taxable income to the employees, since it qualified as a Section 132(d) working condition fringe benefit for the staff members who attended.
John K. McGill is a tax attorney, CPA, and MBA, and is the editor of The McGill Advisory, a monthly newsletter helping dentists to maximize profitability, slash taxes, and protect assets. The newsletter ($199 a year) and consulting information are available from Blair/McGill and Company, 2810 Coliseum Centre Drive, Suite 360, Charlotte, NC 28217. Call (704) 424-9780 or visit the Web site at www.bmhgroup.com.
